Are Noble Energy's Assets Valuable?

Before you go, we thought you'd like these...
Before you go close icon

When it comes to the oil and gas industry, assets matter a lot. For companies operating here, there's nothing more important than reserves, rigs, submersibles, and refineries. However, these assets must be capable of generating profitable returns.

Value for money
These returns indicate whether a given company has the capability of using its assets efficiently and profitably. After all, it makes little sense for an exploration and production company to have a lot of acreage, but not the ability to pull out the oil (or natural gas for that matter) within. In short, it pays to find out how valuable these assets are to the company.

Here, we will find out whether a given company's assets are profitable and efficient compared to its peers based on some important metrics:

  • Return on assets, or net income divided by total assets, shows how much the company is earning compared to the assets it controls. The ratio is an indication of how effectively the company is converting the money it has invested in reserves, property, and other equipment into net earnings. The higher the value, the more profitable the assets are. The metric is pretty useful when used as a comparative measure -- against peers and also against the industry in general. A value greater than 4.5% is what investors should be ideally looking for in this industry.
  • Fixed-asset turnover ratio, or revenue divided by total fixed assets (like plant, property, and equipment). Fixed assets form a major chunk of total assets for companies in this industry. This metric shows how efficiently the company is using its fixed assets to generate revenue. The higher the turnover rate, the better. A value of 0.6 looks ideal.
  • Total enterprise value/discounted future cash flows shows how expensive the company is when compared against its standardized future cash flows. The denominator indicates the total present value of estimated future cash inflows from proven reserves, less future development and production costs, discounted at 10% per annum. It's based on today's energy prices and doesn't give any credit for unproved reserves.

With these in mind, let's take a look at Noble Energy (NYS: NBL) and see how it stacks up against its peers:

Company

Return on Assets

Fixed-Asset Turnover Ratio

P/B

TEV/DFCF

Noble Energy2.8%0.32.181.87

Southwestern Energy

(NYS: SWN)

10.6%0.53.994.78

Encana

(NYS: ECA)

1.4%0.31.121.46

Nexen

(NYS: NXY)

5.6%0.41.351.67

Source: Capital IQ, a division of Standard & Poor's; company filings.

Noble's assets don't seem to generate great returns compared to its peers and the industry at large. Moreover, its asset turnover is among the weakest.

Deeper analysis suggests that the company is not too expensive among peers when compared to its future cash flows from proven reserves. However, that's not too surprising given the unimpressive returns. With these figures in mind, I feel that the stock is priced appropriately compared to its book value and reserves.

Foolish bottom line
While this is not the only criterion, assets generally indicate how oil and gas companies have been faring in terms of operations. A more comprehensive understanding can be sought by digging deeper, but Noble Energy doesn't appear to offer the best returns in the industry.

If you'd like to stay up to speed on the top news and analysis on Noble Energy, add it to My Watchlist.

At the time this article was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended writing puts in Southwestern Energy. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners